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Sovereign Debt Crisis in Euroland: Root Causes and Implications for European Integration Henk Overbeek This article considers the likely impact of the global crisis on the prospects for the European project. First, it considers the nature of the current crisis. It argues that it is comparable, in terms of its deep structural character, to the one in the 1930s. The crisis manifested itself first in the financial sector, but was caused by underlying problems of overaccumulation, which explains the succession of speculative booms and busts from the 1980s onward. The article then analyses how the financial crisis trans- muted into the current sovereign debt crisis in Europe. It identifies a number of interdependent factors responsible for this: the bailouts of banks following the credit crisis; the stimulus programmes necessitated by the danger of a deep economic recession; the structural problems of the European Monetary Union leading to the accumulation of debt in the peripheral members; and finally the catalytic action of speculation in the financial markets. Finally, the article discusses responses to the debt crisis, outlining the contours of two alternatives (muddling through and Europeanisation), their implications, and some of the conditions for suc- cess. The conclusion is rather pessimistic: chances that an effective, timely and sustainable solution will be realised do not seem high. Keywords: euro crisis, sovereign debt crisis, financialisation, overaccumulation, democratic deficit Henk Overbeek is Professor of International Relations at the VU University Amsterdam. Email: [email protected]. This article is an abbreviated and adapted version of a chapter (‘‘Global Capitalist Crisis and the Future of the European Project’’) in Globalisation and European Integration, edited by Nousos, Overbeek and Tsolakis. The manuscript for the article was first submitted for review on 24 August 2011. The author is grateful to three anonymous reviewers as well as the editor of this special issue, Lorenzo Fioramonti, for very useful comments. The final version of the article was submitted on 6 December 2011. On the basis of the reviews, a number of changes were made to the original text. However, the author decided not to incorporate new events since August into the account. New develop- ments were occurring almost on a daily basis and it would have been impossible to appreciate them correctly. Instead, a very brief Postscript has been added to reflect on the degree to which developments since August may or may not have made the analysis presented in the article redundant. The International Spectator, Vol. 47, No. 1, March 2012, 30–48 ISSN 0393-2729 print/ISSN 1751-9721 online ß 2012 Istituto Affari Internazionali http://dx.doi.org/10.1080/03932729.2012.655006 Downloaded by [South African Reserve Bank] at 00:58 05 June 2012

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Page 1: Sovereign Debt Crisis in Euroland: Root Causes and ... · Sovereign Debt Crisis in Euroland: Root Causes and Implications for European Integration Henk Overbeek This article considers

Sovereign Debt Crisis in Euroland: RootCauses and Implications for EuropeanIntegration

Henk Overbeek

This article considers the likely impact of the global crisis on the prospects

for the European project. First, it considers the nature of the current crisis.

It argues that it is comparable, in terms of its deep structural character, to

the one in the 1930s. The crisis manifested itself first in the financial

sector, but was caused by underlying problems of overaccumulation,

which explains the succession of speculative booms and busts from the

1980s onward. The article then analyses how the financial crisis trans-

muted into the current sovereign debt crisis in Europe. It identifies a

number of interdependent factors responsible for this: the bailouts of

banks following the credit crisis; the stimulus programmes necessitated

by the danger of a deep economic recession; the structural problems of the

European Monetary Union leading to the accumulation of debt in the

peripheral members; and finally the catalytic action of speculation in the

financial markets. Finally, the article discusses responses to the debt crisis,

outlining the contours of two alternatives (muddling through and

Europeanisation), their implications, and some of the conditions for suc-

cess. The conclusion is rather pessimistic: chances that an effective, timely

and sustainable solution will be realised do not seem high.

Keywords: euro crisis, sovereign debt crisis, financialisation,

overaccumulation, democratic deficit

Henk Overbeek is Professor of International Relations at the VU University Amsterdam.Email: [email protected]. This article is an abbreviated and adapted version of a chapter (‘‘GlobalCapitalist Crisis and the Future of the European Project’’) in Globalisation and European Integration,edited by Nousos, Overbeek and Tsolakis. The manuscript for the article was first submitted for reviewon 24 August 2011. The author is grateful to three anonymous reviewers as well as the editor of this specialissue, Lorenzo Fioramonti, for very useful comments. The final version of the article was submitted on6 December 2011. On the basis of the reviews, a number of changes were made to the original text.However, the author decided not to incorporate new events since August into the account. New develop-ments were occurring almost on a daily basis and it would have been impossible to appreciate themcorrectly. Instead, a very brief Postscript has been added to reflect on the degree to which developmentssince August may or may not have made the analysis presented in the article redundant.

The International Spectator, Vol. 47, No. 1, March 2012, 30–48 ISSN 0393-2729 print/ISSN 1751-9721 online� 2012 Istituto Affari Internazionali http://dx.doi.org/10.1080/03932729.2012.655006

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The euro is reeling, and with it the future of the European integration project.

Governments in Europe seem unable to deal with the sovereign debt crisis, and as a

result of this political paralysis matters are going from bad to worse, endangering

the survival of the project that took off shortly after World War II with the plans to

create a European Coal and Steel Community (ECSC). What has happened?

In most accounts of the crisis, and in particular in the popular press, the communisopinio is that the crisis has its origins in the financial sector, and that it threatens to

spill over into the ‘real’ economy. This view represents a profound misunderstand-

ing of the nature of the current crisis. In the second section, this article will argue

that it is a lingering problem of overaccumulation of capital in the developed

capitalist economies that has produced the successive bursts of speculative,

finance-based, growth that have all ended in busts. The relative absence of profit-

able investment outlets in the ‘real’ economy (i.e. in the production and distribu-

tion of goods and services that would satisfy the demands of human beings with

sufficient income to afford these goods and services) explains the flight of capital

into speculative enterprises (summarised with the term ‘financialisation’).

The article then turns to the question of how the global credit crisis of 2007–08

morphed into the European sovereign debt crisis of 2010–11. Here the argument is

that the current situation was created by the interaction of three factors: the impact

of the trend to financialisation in the European economies, the design defects of the

European monetary union, and the neomercantilist accumulation strategy pursued

by dominant economic interests in Northern Europe, Germany in particular. The

increasingly parasitic behaviour of the European financial markets worked as a

catalyst upon the contradictions inherent in this state of affairs. It is the relentless

speculation by ‘the markets’ against what were perceived as the weakest links that

transformed the issue of rising sovereign debt into an acute crisis early in 2010.

Subsequently, the analysis reviews the most likely ‘solutions’ to the crisis. Here,

the argument is that the current scenario – muddling through – is likely to be

continued for some time, with quite negative consequences for the European

periphery as well as for the democratic legitimacy of the European project.

Alternatively, we may see the gradual acceptance of the need for a truly

European solution. However, public discussion of this scenario has so far conspicu-

ously ignored the need for innovative European democratic accountability to

restore some popular legitimacy to ‘Europe’. Finally, the conclusion relates the

European debate to the wider global context and concludes that there is little

reason to be hopeful about the prospects of the European project.

The origins of the contemporary crisis in global capitalism

Capitalist crises can take various forms: underconsumption when there is insuffi-

cient demand, or overproduction when more commodities are produced than can

Sovereign Debt Crisis in Euroland 31

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be sold on the market. In the longer run, all these cases amount to ‘‘a situation in

which capital accumulates at a higher rate than what can prevent the average rate of

profit across the capitalist system from falling’’.1 What matters is that the logic of

the accumulation process itself produces a variety of crisis tendencies, together

leading to (the anticipation of ) a fall in the rate of profit that capital can realise:

this is what is generally referred to in Marxist theory as overaccumulation.2 In other

words, we speak of overaccumulation when capitalist firms cannot invest their

profits in the expansion of their primary activities in production and distribution

at the prevailing rate of profit, and are forced to search for alternative outlets where

profits are higher, such as in financial speculation. As a consequence, the accumu-

lation of productive capital slows down.

The current crisis, much like the Great Depression of the years 1929–45, marks

the end of such a period of slow capital accumulation. Global capitalism experi-

enced several decades of unprecedented growth during the postwar years, roughly

from the late 1940s to the early 1970s. The nature of capitalism in this period,

especially the predominance of Keynesian demand management, the relative clo-

sure of national economies and the ‘controlled’ restoration of international trade

(cf. Ruggie’s concept of ‘‘embedded liberalism’’3), was very much shaped by the

experiences of the Great Depression. In a similar vein, the recession of the 1970s

determined the character of the subsequent period of neoliberal globalisation. The

main response of capital to the crisis of the seventies was a mix of temporal and

spatial fixes, to use Harvey’s terminology.4

Spatial fixes involve the displacement of capital into foreign activities, whether

through the relocation of production and the establishment of foreign subsidiaries,

through cross-border mergers and acquisitions (M&As), or at a more general level

through the incorporation of new zones into the capitalist world market (as empha-

sized in World Systems Theory5) in order to find new markets and raise profit-

ability through cheaper inputs. This often involves what Harvey has called

‘‘accumulation by dispossession’’, or the subordination to the pursuit of private

profit of economic assets and activities previously not (fully) commodified.6 The

key spatial fix of the past decades has been the incorporation of the People’s

Republic of China into the capitalist world market after 1978, followed after

1989 by the incorporation of the former Soviet Union and Eastern Europe.

1 Hung, ‘‘Rise of China and Global Overaccumulation Crisis’’, 152.2 Cf. Harvey, The New Imperialism; Hung, Ibid.3 In Ruggie, ‘‘International Regimes, Transactions, and Change’’.4 Harvey, The Condition of Postmodernity, and The New Imperialism; cf. also Dumenil and Levy, The Crisisof Neoliberalism, 19–22.5 Wallerstein, The Modern World System Vol. I. and The Politics of the World-Economy.6 Harvey, The New Imperialism, 145 ff.

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The acquisition of local assets – often newly privatised – afforded international

capital ample opportunity to realise profits very quickly. In a non-geographical way,

the waves of denationalisation and privatisation in most European countries of

the Organisation for Economic Cooperation and Development (OECD) during

the 1980s and 1990s, and the subsequent creation of a market for corporate control

in the European Union (EU), constituted other major forms of accumulation by

dispossession.7

Temporal fixes for the problem of overaccumulation all function to maintain

profitability in the present by impairing profitability and stability in the future

through debt financing.8 Looking at how capital has responded to the problem of

overaccumulation since the 1970s, we see that the temporal fix in this era has taken

the form of an unprecedented financial expansion. As Robert Cox already

commented in 1992, ‘‘finance has become decoupled from production to

become an independent power, an autocrat over the real economy’’.9 The financial

sector has expanded far beyond any reasonable need to facilitate production, dis-

tribution and consumption, which are after all the basic functions that an economy

needs to perform for society. These financial expansions (not new in the history of

capitalism), called financialisations, are defined as patterns of accumulation in

which profits accrue primarily through financial channels rather than through

trade and commodity production.10 This trend is reflected, firstly, in differential

profit rates between financial and non-financial companies, but can also be found

within non-financial firms, expressed in the increasing proportion of total profits

deriving from purely financial transactions as opposed to profits deriving from

productive activities.11

The global crisis first manifested itself in the collapse of the subprime mortgage

market in the United States (US), then spread quickly through the Atlantic financial

markets, and then transformed into a deep recession, thus underscoring that the real

underlying problem was indeed a problem of overaccumulation: no matter how

much liquidity central banks have pumped into the system since 2008, it has

hardly resulted in a notable restoration of domestic investment in the ‘old’ OECD.

The genesis of the European sovereign debt crisis

In the recession of the late 1960s and early 1970s, overaccumulation of capital was

as much a problem in Europe as it was in the US. European responses to the crisis

7 Ibid., 145–82; also Van Apeldoorn and Horn, ‘‘The Marketisation of Corporate Control’’.8 Cf. Harvey, The New Imperialism.9 Cox, ‘‘Global Perestroika’’, 29.10 Krippner, ‘‘Financialization of the American Economy’’,174; after Arrighi, The Long Twentieth Century.11 Ashman et al., ‘‘The Crisis in South Africa’’, 175.

Sovereign Debt Crisis in Euroland 33

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varied widely. Both spatial and temporal fixes were actively pursued but the mix

was different between countries as well as over time.

Overaccumulation and spatio-temporal fixes

The initial reaction on the part of productive capital in Europe was a combination

of rationalisation and automation at home, and relocation especially of labour-

intensive production processes to low wage countries: the ‘new international divi-

sion of labour’ as it was dubbed in the classic study of the time.12 The great

German and French industrial conglomerates in particular have consistently advo-

cated and pursued an accumulation strategy based on spatial fixes. In response to

the crisis of the late 1970s and early 1980s, this first took the form of the integra-

tion of Southern Europe into the orbit of Northern European capital, and the

relocation of a great part of the production of parts and assembly activity to Spain

and Portugal.13 Subsequently, the transformation of the Deutsche Mark-zone into

the Economic and Monetary Union (EMU) was the second cornerstone of this

strategy: originally agreed for political reasons during the Maastricht Summit, the

creation of EMU and the introduction of the euro rapidly became key ingredients

of the accumulation strategy of Franco-German industrial capital, as they set a

brake on the appreciation of the D-Mark and gave German (and French) industrial

groups an important additional competitive edge, reinforced by a consistent policy

of wage restraint and suppression of domestic consumption (actually pioneered by

the Dutch in the early 1980s).

The double (political and economic) transformation in Central and Eastern

Europe after 1989 provided this strategy with new momentum:14 the low-paid,

highly skilled, labour forces in Central Europe provided Western European busi-

ness with the ideal platform from which to deepen its internal division of labour

and open a new offensive on the global markets.15 In the wake of the great

industrial conglomerates, German and French banks also expanded their activities

in Eastern Europe, followed by Austrian and Italian banks in what could be

considered a subordinate role.16

Politically, this ‘Euro-liberal ’ orientation aims to create a prominent role for the

European political level (though not necessarily institutionalised in the EU) in

establishing and guaranteeing a ‘level playing field’ through market-based conver-

gence within the EU.17 It is politically spearheaded by the German and French

governments and the European Commission. In the early days, traditionally

12 Frobel et al., The New International Division of Labour.13 Cf. Holman, Integrating Southern Europe.14 Holman, ‘‘Integrating Eastern Europe’’.15 See Bohle, ‘‘Race to the Bottom?’’.16 Vliegenthart and Overbeek, ‘‘Corporate Governance Regulation in East Central Europe’’.17 See Vliegenthart and Overbeek, ‘‘Corporate Tax Reform in Neoliberal Europe’’, for the original char-acterisation of this orientation.

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protectionist European firms were influential in setting the tone of the debate e.g in

the Delors Commission, emphasising the unique character of the European social

model and the ambition to reproduce something like a Rhenish capitalist model on

the EU level.18 However, the advocates of such a strategy suffered defeat when its

main protagonist in the erstwhile German government, Oskar Lafontaine, was

forced to resign his influential cabinet post in 1999. His departure from the

political stage marked the end of protectionist forces in Europe and their succession

by the much more neoliberally oriented ‘Euro-mercantilist ’ camp.19

The ambition of this orientation is to utilise the enlarged European economic

space to develop an integrated European technological-industrial complex ulti-

mately able to compete with the US and the great industrial powers of Asia.

The social basis of this camp is made up of a range of internationally competitive,

Europe-based, manufacturing conglomerates (many of the members of the

European Roundtable of Industrialists) dubbed ‘Euro-contender capital’ by Van

der Pijl (e.g. Daimler-Benz, Fiat, Volkswagen, Unilever, and Deutsche Bank20), as

well as of parts of the established trade union movement. A recent study has shown

that the rise to centrality of especially German capital in the networks of corporate

interlocks actually predates the crisis and can be seen as a continuous process since

the end of the Cold War and the creation of the Single Market and EMU, and has

intensified in the new millennium.21

Nevertheless, although spatial fixes have been central to the strategies of the big

European industrial conglomerates in the past decades, these have at the same time

engaged heavily in pursuing other shortcuts to increased profitability, such as

hoarding cash, currency and real estate speculation, and consumer credit financing.

In the United Kingdom (UK), the Thatcher revolution with its liberalisation,

privatisation and deregulation offensives unleashed an internal, unmediated and

forceful wave of accumulation by dispossession.22 Financialisation developed quite

unevenly in different European countries: of the major countries, it developed

latest and slowest in Germany (see Table 1 for some indicative data23). By the

end of the 20th century, finance-led accumulation had become the predominant

growth model, not only in the traditional centre of financial globalism, the UK,

but also in most of continental Europe.

18 Holman, ‘‘Transnational Class Strategy and the New Europe’’.19 Van Apeldoorn, Transnational Capitalism and European Integration.20 Van der Pijl, Global Rivalries from Cold War to Iraq, 264.21 See Van der Pijl et al., ‘‘The Resurgence of German Capital’’, for data.22 Cf. Overbeek, Global Capitalism and National Decline.23 Also see Konings, ‘‘European Finance in the American Mirror’’; Dunhaupt, Financialization and theRentier Income Share.

Sovereign Debt Crisis in Euroland 35

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The rise to supremacy of finance-led accumulation even in Germany, com-

pounded by such global transformations as the disintegration of the Soviet

Union and the Asian financial crisis which represent a watershed in the deepening

of global neoliberalism, has strengthened the hand of the neoliberal globalist camp.

This neoliberal globalist orientation refuses any attempt to ‘regulate’ European

capital and advocates the freedom of capital to move and to accumulate. This

orientation expresses the specific interests of mobile European capital competing

directly on the global markets (primarily financial and commercial interests plus

the international oil and gas sector): such corporate interests as Royal Dutch Shell,

BP, British Gas, British Telecom, Glaxo and Nestle, as well as global finance and

services capital (the City of London, but also Allianz) come to mind.24 Politically,

the British government traditionally represents this orientation, often supported by

organisations of highly skilled labour.

Financialisation and crisis

In the run-up to the global financial crisis in 2008, the grip of finance on the

European political economy strengthened enormously, most spectacularly in those

European economies where financialisation constituted the core of the response to

the lingering problem of overaccumulation. Spurred by the concentration of the

global financial sector in the City of London, financial expansion was most pro-

nounced in the UK, Ireland and Iceland (which according to a senior official of the

International Monetary Fund could no longer be considered a country but instead

had to be understood as a hedge fund25). The ratio of financial assets to GDP

increased sharply, reaching nearly 600 percent in the EU, nearly 700 percent in

France and the UK, and 900 percent in Ireland (see Table 2).

Table 1. Gross Value Added in Financial Intermediation, Real Estate, Renting,

Business Activities & Construction, as % of Total Gross Value Added, 1995–2008

France Germany Italy Netherlands Spain

1995 34.6� 33.2 27.7 29.6 25.42000 35.9 32.7 29.7 32.9 27.82005 37.9 30.5 32.9 33.0 32.62008 40.1 33.7 34.1 34.1 34.4

�¼1999Source: Calculated from OECD National Account Statistics, http://www.oecd.org.

24 See Van der Pijl, Global Rivalries from Cold War to Iraq, 264.25 Quoted in Palma, ‘‘The Revenge of the Market’’, 834.

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In Iceland, not an EU member state but deeply integrated with the EU economy,

the assets of the three biggest banks alone surpassed 800 percent of GDP by

2007.26 The integration of financial markets in the EU, and the creation of a

European market for corporate control,27 facilitated and indeed stimulated the

penetration of the practices of financialisation in those continental European

economies that had been relatively insulated from this development before

(Germany in particular).

Another temporal fix pursued by money capital in a number of European coun-

tries was overinvestment in real estate, especially in Ireland, the UK and Spain,

where house prices increased about threefold in the period 1997–2007.28

Finally, European banks were differentially affected by the spread of securitised

subprime mortgages from the US. Most Spanish banks, and some of the more

‘conservative’ European banks like the Dutch Rabobank, were hardly affected.29

Table 2. Bonds, Equities and Bank Assets as % of

GDP, 2007

Euro Area 557.6

of which:Austria 406.2Belgium 824.1Finland 371.3France 668.5Germany 430.8Greece 436.7Ireland 900.4Italy 453.9Luxembourg 3,234.4Netherlands 830.8Portugal 389.5Spain 550.2

compare to:World 439.6UK 690.2US 445.0Japan 546.6

Source: IMF, Global Financial Stability Report, 177.

26 Wade and Sigurgeirsdottir, ‘‘Lessons from Iceland’’, 14.27 Van Apeldoorn and Horn, ‘‘The Marketisation of Corporate Control’’; see also Horn, Transformation ofEU Corporate Governance Regulation.28 ‘‘Houses Built on Sand’’, The Economist, 13 September 2007, http://www.economist.com/node/9804125.29 See Nesvetailova and Palan, ‘‘A Very North Atlantic Credit Crunch’’, 166–7.

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UK banks initially accounted for the bulk of securitisation, but after 2007 con-

tinental banks (France, Netherlands, Germany) overtook the UK on this score.30

From banking crisis to sovereign debt crisis

As of early 2010, the crisis in Europe mutated from a banking crisis into a sover-

eign debt crisis threatening the credibility of the world’s second most important

reserve currency, the euro. A key nexus here is the structure and functioning of the

EMU. The introduction of the single currency on 1 January 1999 stabilised the

credit ratings of the eurozone member states:31 Ireland received triple-A status in

2001 and Spain in 2004 (while Italy, Portugal and Greece had lower ratings).32

However, the exchange rate at which the currencies of Portugal, Spain and Italy

were locked in was unsustainably high, presaging trouble for the future.33

Furthermore, the institutional and technical design of EMU eliminated the tradi-

tional instrument that allowed these countries to maintain their competitiveness,

currency devaluation. The only road left was wage suppression, also known as

‘internal devaluation’34 or, alternatively, compensation by increased budget deficits,

which for a time seemed a viable strategy as Southern EMU governments could

borrow money on the European capital markets at very low rates.35 The creation of

EMU and the introduction of the euro thus led not to convergence but to diver-

gence in the eurozone.

The mercantilism of the Northern EMU members – essentially the members of

the former informal DM-zone (Germany, Netherlands, Austria, Scandinavia,

Belgium) – continued to be based on the relative suppression of domestic

demand through wage restraint and balanced budgets in order to maximise

surpluses on the external account. This policy aggravated the position of the

Southern EMU members as it structurally limited access to their most important

export markets. In the years 1996–2008, Germany’s export volume grew twice as

fast as that of the rest of the eurozone; domestic demand in Germany by

contrast declined by 1.5 percent per year against the rest of the eurozone.36

Its trade surplus fed capital exports from Germany, both reinforcing

the transnationalisation of German industrial capital as well as injecting

30 Ibid., 175.31 In 1999, the eurozone was established by Austria, Belgium, Luxemburg, Germany, Spain, Finland,France, Ireland, Italy, the Netherlands and Portugal. Greece joined in 2001, Slovenia in 2007, Cyprusand Malta in 2008, Slovakia in 2009 and Estonia in 2011. Plans by other Central and East Europeanmember states to join the single currency have been postponed in response to the current crisis. ‘‘EastEuropean States Push Back Entry Dates’’, Financial Times, 13 June 2011, 5.32 De Haan et al., European Financial Markets and Institutions, 84.33 Bellofiore et al., ‘‘The Global Crisis’’, 130.34 Cafruny and Talani, Economic and Geopolitical Dimensions, 13.35 Ibid., 16.36 Young and Semmler, ‘‘The European Sovereign Debt Crisis’’, 10.

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speculative capital into the Southern periphery, especially in the

construction sector.37 In Southern Europe, membership of the eurozone provided

insulation from currency crises and kept interest rates low, thus leading to rising

current account deficits and rising household debt.38 Local banks, but also inter-

national private banks, built up very high exposure to government debt: by 2010,

eurozone banks were exposed to the tune of USD1.4 trillion (German and French

banks each for roughly USD500 billion), with US and UK banks each exposed for

about USD400 billion.39

In Ireland, but to a less dramatic extent also in countries such as the Netherlands,

Belgium and the UK, governments rapidly built up huge debts by stepping in to

bail out (or nationalise) their banks when the credit crisis started to hit them late in

2008, after the collapse of Lehman Brothers in the US. In addition, nearly all

European governments introduced sizeable stimulus programmes in 2009–10 to

counteract the effects of a lack of credit on the international capital markets.

Thus, a combination of factors contributed to the rise of European sovereign

debt. Poor competitiveness, stagnating export markets, low interest rates, domestic

political pressures, and the cost of bank bailouts and stimulus programmes, inter-

acted to cause the rise of sovereign debt all over Europe. By 2010, general govern-

ment gross debt stood at 85 percent of GDP for the eurozone as a whole. This is

high compared to the years just before the global credit crisis erupted in 2008.

Nevertheless, it is not unprecedentedly high, and for several member states debt is

even (considerably) lower than during the second half of the 1990s (Belgium,

Finland, Italy, Netherlands, Spain). This suggests that, especially given the prevail-

ing low interest rates, overall eurozone debt could, in principle, be comfortably

financed.

The conclusion at this point can only be that European sovereign debt has not

become an acute problem because its level has passed some absolute and objective

point of no return, but rather because the markets are demanding an exorbitant

premium when lending to peripheral eurozone governments. The governments of

Greece, Ireland and Portugal were being charged 4–8 percent higher interest rates

than the governments of Germany or the Netherlands (which borrowed at 2–2.5

percent), while the Spanish and Italian governments were being charged 3–4 per-

cent higher. The markets do not trust the longer-term capability of these govern-

ments to service their debts and therefore insulate themselves against possible

future default by realising a superprofit in the present, thus making it nearly

impossible for the governments in question to honour their commitments.

37 Ibid., 13.38 Cafruny and Talani, Economic and Geopolitical Dimensions, 16.39 EuroMemoGroup, ‘‘Confronting the Crisis’’, 8.

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As Europe is learning the hard way, market expectations have a habit of becom-

ing self-fulfilling prophecies. However, the concept of ‘the markets’ needs to be

unpacked. The market is not an actor, but an arena in which actors play out their

individual strategies and in which they respond to each other. Therefore a look has

to be taken at the agency of the financial institutions active on these financial

markets, and first of all at the most active ones, that is the leading global banks

and the major hedge funds.

Financial institutions have played a key role in the European sovereign debt crisis,

not just in the past two years driving up the interest premium that targeted govern-

ments are made to pay, but all along. Take the role that the world’s most powerful

bank, Goldman Sachs, has played in the Greek crisis. It helped the Greek govern-

ment hide part of its debt in order to qualify for EMU membership in 2001–02.40

Subsequently, it advised the Greek government on how to comply with the condi-

tions of the European Central Bank–International Monetary Fund (ECB-IMF)

rescue plan in 2010, as joint lead manager on the issue of E8 bn worth of govern-

ment bonds as well as on the Greek privatisation plans.41 All the big international

banks have been involved in the trade in credit-default swaps (CDS): ‘‘These con-

tracts . . . effectively let banks and hedge funds wager on the financial equivalent of a

four-alarm fire: a default by a company or, in the case of Greece, an entire country. If

Greece reneges on its debts, traders who own these swaps stand to profit.’’42

What is to be done?

Roughly speaking, there are three possible ways of dealing with the euro crisis.

The first option would be to accept the inability of the eurozone to deal with the

debt crisis now facing its peripheral members and to arrange for a managed

exit of Greece,43 maybe also of Ireland and Portugal, and possibly even of

Spain and Italy, leaving a core eurozone that would look suspiciously like the

informal D-Mark zone that preceded it. In a more radical departure, the complete

dissolution of the eurozone could come about if Germany were to decide to leave

the euro.

40 ‘‘How Goldman Sachs Helped Greece Mask its True Debt’’, Der Spiegel, 8 February 2010, http://www.spiegel.de/international/europe/0,1518,676634,00.html.41 ‘‘Goldman Sachs plays Key Role in Rescue’’, Financial Times, 29 January 2010, http://www.ft.com/intl/cms/s/0/fb84df2e-0c75-11df-a941-00144feabdc0.html#axzz1V6OWWN73.42 N. Schwartz and E. Dash, ‘‘Banks bet Greece Defaults on Debt they Helped Hide’’, New York Times, 25February 2010.43 The details of this possible scenario will not be examined here. Suffice it to say that a breakup of theeuro area, although undoubtedly extremely costly, is not impossible. This was the conclusion of BarryEichengreen, who added that because of the political obstacles it is most unlikely to happen ‘‘except underthe most extreme circumstances’’ (Eichengreen, The Breakup of the Euro Area, 36).

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The second option would be to seize the opportunity that the crisis presents and

complete the design of the monetary union by creating a minimal joint fiscal and

economic policy, some mechanism for the correction of unequal development

within the monetary union and the creation of a eurobond market (partly) repla-

cing the existing 17 national bond markets of the eurozone.

The third option is the one that seems to be the natural first choice of the EU

whenever confronted with a problem: that is, muddling through. It consists of

avoiding any radical choices in the hope that the problem will go away. This option

usually works for a while in the sense that the symptoms of the problem are

temporarily weakened, but it never succeeds in resolving the underlying problem.

In the nearly permanent discussions on the right way to handle the crisis, the

dominant voice so far has been that of the German government, usually cheered on

by the Dutch and – sometimes reluctantly – supported by the French. On the one

hand, the position taken has been that the euro will be defended at any cost, but on

the other hand, the German government has vetoed any move towards further

Europeanisation of sovereign debt in whatever form:44

� it opposes the buying up of bonds by the European Central Bank (ECB) –

even though the ECB has so far intervened massively twice, by buying Greek

and Portuguese (2010) and Spanish and Italian debt (2011) to the total tune

of nearly E100 bn – both because of the inflationary pressures that may result,

and because it exposes the surplus EMU members directly to the risk of

default by the deficit members;

� it has so far also blocked the creation of eurobonds, again mostly on the

grounds that this would expose Germany to the risk of default by the periph-

eral countries.

The German line has in effect been to muddle through. It has pushed through

the European Financial Stability Facility (summit December 2010) and agreed with

France on creating ‘true European economic governance’ (in July 2011). In reality,

these are essentially intergovernmental constructions sidelining the European insti-

tutions. This has led, and will no doubt continue to lead to frictions between the

German government and the ECB. It will not bring structural reforms to EMU,

it does not entail stricter regulation of the financial markets, and as a consequence

it seems a recipe for recurring crises because the markets will keep smelling blood.

The only ‘critical’ component of Germany’s preferred package, a contribution by

the financial sector itself – the famous ‘haircut’ – was watered down to a very

vaguely formulated voluntary contribution during the July 2011 negotiations over

the second Greek bailout package.

44 Young and Semmler, ‘‘The European Sovereign Debt Crisis’’, 14–15.

Sovereign Debt Crisis in Euroland 41

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The implications of this line of action, for as long as it may last, would be the

further deepening of the European neoliberal project, prioritising the interests

of financial capital over those of production and the working population, and

continued austerity in Northern Europe aimed at strengthening the German-led

mercantilist strategy. This global competitiveness project is pursued at the expense

of the European periphery (inside and outside the EU). It will impose continued

internal deflation in Southern Europe, with rapidly rising social inequality, political

risks, rising authoritarianism. In spite of the lengths to which the Greek and

Portuguese governments have already gone to placate their Northern creditors,

there are limits to the burdens they can impose on their populations. The external

pressure exerted on these governments is enormous, and is reflected in the language

used in the editorial comments in one of the leading international financial papers:

‘‘Athens must be put under the gun’’, and ‘‘Spain occupies the Eurozone front

line’’.45 In fact, the so-called rescue packages for Greece, Ireland and Portugal have

already brought ‘‘disciplinary neoliberalism’’46 into the European Union, and are

exposing them to accumulation by dispossession: as the Wall Street Journal noted,

‘‘Greece is for sale – cheap – and Germany is buying’’.47 Pursuit of this line can in

the longer run only result in the demise of the EMU. But the demise of the euro

will also spell the end of German mercantilism: it will imply the resurrection of a

DM-zone, and the DM will soar on the international currency markets (like the

Dutch guilder and the Austrian schilling), and Germany’s surpluses will quickly

shrink.

There are alternatives to this scenario. The most likely alternative would be a

gradual acceptance, contre cœur, of the Europeanisation of the sovereign debt

markets and some form of European economic governance. The modalities are

unclear at present. In the short run, there will inevitably need to be a restructuring

of Greek (and possibly Portuguese and Italian) debt; banks hit disproportionately

by such write-downs will have to be recapitalised. In the somewhat longer run,

eurobonds may be promoted as (part of ) the solution,48 while others prefer the

ECB to continue and to expand the buying up of national debt.49 These short-term

measures will enable peripheral governments to refinance their remaining sovereign

45 ‘‘Athens Must be Put Under the Gun’’, Editorial Comment, Financial Times, 10 May 2011, 8; and‘‘Spain Occupies the Eurozone Frontline’’, Editorial Comment, Financial Times, 1 August 2011, 6,respectively.46 Gill, ‘‘Globalization, Market Civilization’’.47 Quoted by M. Hudson, ‘‘The Financial Road to Serfdom. How Bankers Use the Debt Crisis to RollBack the Progressive Era’’, Global Research.ca, 13 June 2011, 2, http://www.globalresearch.ca/index.php?context=va&aid=25250.48 As advocated, for instance, by G. Amato and G. Verhofstadt, ‘‘A Plan to Save the Euro, and Curb theSpeculators’’, Financial Times, 4 July 2011, 7; by M. Monti and S. Goulard, ‘‘Eurobonds are the OnlyAnswer’’, Financial Times, 21 July 2011, 11; and by J. Stiglitz, ‘‘Now the Central Bank Must Act’’,Financial Times, 21 July 2011, 11.49 P. De Grauwe, ‘‘Only the ECB can Halt Eurozone Contagion’’, Financial Times, 4 August 2011, 9.

42 H. Overbeek

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debt at low (close to German) interest rates, thus making their debt service finan-

cially sustainable in the long run.50

In most cases it is agreed that such a solution requires some form of European

fiscal governance: strong and automatic sanctions need to deter governments from

spending and borrowing beyond their means. For such a solution to be credible, it

would require that the oversight task be entrusted to some independent authority

that is not subject to direct political control by the member state governments.

Looking at the discussions generated by the need for a second Greek ‘rescue

package’, this alternative is not completely unthinkable. If the acute situation on

the financial markets deteriorates further, such an alternative may become a realistic

option, for instance involving the expansion of the ECB mandate or the creation of

an independent European ‘budget authority’ (as proposed by the Dutch govern-

ment). There are however at least three (partly inter-related) problems that would

also need to be resolved for these short- and medium-term measures to become

effective, but which are currently not recognised as real problems.

For one, as this analysis has shown, the high deficits in the Southern peripheral

countries (Greece, Portugal, Italy) have much to do with the suffocating effects of

EMU on Southern exports to the North. Any strategy to restore the health and

stability of the euro will therefore need to include a strategy for restoring real

economic growth (as opposed to speculative bubbles). In effect, the monetary

union will have to be complemented by some form of a transfer union as well.

The one percent of European GDP now going to the total EU budget is grossly

inadequate to perform this role. In this context, there will also have to be a

European public investment programme for which the European Investment

Bank, once created for precisely such purposes, might be revitalised and capitalised

on an adequate scale, as Joseph Stiglitz has recently suggested.51 Some key ingre-

dients of such a programme may be the integration and large-scale expansion of

Europe’s high-speed railway network; large-scale investment in the development of

sustainable energy; and on that basis the massive and accelerated introduction of a

new generation of automobiles propelled by sustainable fuel.

Secondly, eurozone policies have so far concentrated on insulating the banks

from losses: they are allowed to make extraordinary (private) profits while their

losses are ‘socialized’ and paid for by the European populations.52 In July 2011, in

50 J. Sachs, ‘‘Greece can be Saved – Here is How to do it’’, Financial Times, 1 July 2011, 9.51 J. Stiglitz, ‘‘Now the Central Bank Must Act’’, Financial Times, 21 July 2011, 11.52 M. Hudson, ‘‘Drop Dead Economics: The Financial Crisis in Greece and the European Union. TheWealthy won’t Pay their Taxes, so Labor Must do so’’, Global Research.ca, 11 May 2010, and ‘‘TheFinancial Road to Serfdom. How Bankers use the Debt Crisis to Roll Back the Progressive Era’’, GlobalResearch.ca, 13 June 2011; M. Hudson and J. Sommers, ‘‘The Spectre Haunting Europe: DebtDefaults, Austerity, and Death of the ‘Social Europe’ Model’’, Global Research.ca, 18 January 2011,http://www.globalresearch.ca/PrintArticle.php?articleId=22846.

Sovereign Debt Crisis in Euroland 43

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an obvious attempt to disarm the German government’s call for private sector

‘participation’ in the second rescue package for Greece, the Institute of

International Finance (representing the majority of financial institutions in

Europe) in a six-page report (some might be tempted to call it a ransom note)

rejected this idea and demanded ‘‘that the European Union commit itself to a buy-

back of the debt, possibly with billions in government money’’.53 In fact, the banks

want to have their cake and eat it too. They charge very high-risk premiums when

lending money to peripheral governments based on the logic that they must protect

themselves against the risk of default, and that they must use the extra interest in

order to make proper risk provisions in their balance sheets. Then they turn around

and demand that the German, French, and other Northern governments guarantee

to take Southern bonds off their hands without any loss. If Northern governments

do that (as they have done so far), then where is the risk, and therefore the

legitimation for the risk premium? With respect to Greece, this line will safeguard

the banks from paying the price for their gamble. ‘‘In 2015 Greece will be bankrupt

but its debt will be held overwhelmingly by public lenders: the EU, the ECB and

IMF. When default comes, the banks will be out of it and Europe’s taxpayers will

bear the burden.’’54

Stricter regulation of the financial markets, however, or a ban on the most risky

forms of derivatives trading, is kept off the agenda in a remarkable demonstration

of the structural power of finance. Yet, there is nothing inherently inevitable about

the demands of the markets. In March 2011, speculators turned against the

Japanese yen in the aftermath of the tsunami plus nuclear reactor meltdown,

‘‘betting that Japanese insurers and other big companies would have to repatriate

funds to meet claims and pay for reconstruction’’55 and thus push up the exchange

rate of the yen. The four leading central banks in the world (the Federal Reserve

Board, the ECB, the Bank of Japan and the Bank of England) undertook concerted

action to repel the attack and were successful in driving down the yen.56 Even

without formal regulation, when acting decisively, the proper authorities are appar-

ently perfectly able to restrain the markets.

Finally, and directly following from this, all proposals for some form of

European fiscal and economic governance have ignored the question of democratic

accountability. There are strong tendencies towards technocracy (strengthening the

role of the ECB), and towards intergovernmentalism (especially French-German

bilateralism), while parliamentary oversight is extremely weak at the national level

53 ‘‘Markets Rocked as Debt Crisis Deepens’’, Financial Times, 12 July 2011, 1.54 C. Lapavitsas, ‘‘Euro Exit Strategy Crucial for Greeks’’, The Guardian, 21 June 2011.55 ‘‘G7 Nations in $25 bn yen Sell-off’’, Financial Times, 19–20 March 2011, 1.56 Ibid.

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and non-existent at the European level. For any ‘European’ solution to the debt

crisis to work, it will need to be legitimate as well as technically feasible.

Most European politicians, especially those in government, have not even begun

to publicly address these issues, preferring as they do to concern themselves pri-

marily with the short term, and especially with their chances to survive in the next

elections (coming up in 2012–13 in several of the leading eurozone member states).

They shy away from thinking creatively about how to strengthen the democratic

credentials of European institutions and of Euro-level decision-making, and revert

(at least rhetorically) to an unholy mixture of intergovernmental deals and

renationalisation.

Conclusion

There is every reason to be pessimistic about the prospects of the European polity.

The dynamics of the sovereign debt crisis have so far strengthened the relative

position of German-led neomercantilist forces, which are guided less by considera-

tions of strengthening European integration per se than by the imperative of strength-

ening the competitive position of transnational European capital vis-a-vis its

American and Asian rivals. This suggests that the debate on the European sovereign

debt crisis is inward looking, largely ignoring the global context in which the future

of the European project will be decided. In fact, the euro crisis ties in with the debt

crisis in the US, and with the pressure this puts on the role of the US dollar as the

prime international reserve currency. Even if the Europeans themselves may not

realise this, many emerging economies look to the euro as a valuable alternative to

the dollar. The Chinese government, which is sitting on a record USD3.2 trillion

mountain of currency reserves, is looking for ways to reduce its dependence on the

dollar and on US government securities, which explains its interest in buying

troubled eurozone government bonds. Other new economic powers from the

global South such as Brazil likewise look to Europe. Strengthening relations with

these new economic powers might provide the eurozone with additional tools with

which to deal with the internal problems of the European economies. However, here

too a credible solution to the political and institutional shortcomings of the eurozone

is a precondition for this to actually materialise.

There is one final issue to be addressed. Even if all the conditions mentioned so

far were met, and a credible, strong and democratically legitimated new style EMU

with strictly regulated financial markets were to emerge, it is very unlikely that this

would mean the end of the economic and financial problems. As argued at the

beginning of this article, the financial crisis is not the ultimate cause of the pro-

blems that have brought the European project to the brink. The financial crisis is

itself a symptom and product of the underlying structural crisis of overaccumula-

tion that has plagued developed capitalism since the 1970s. This is a problem of the

Sovereign Debt Crisis in Euroland 45

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‘real’ economy and cannot be resolved by whatever ‘money artistry’ the Europeans

(or the Americans for that matter) come up with.57 Only once the underlying crisis

of overaccumulation is overcome can better prospects for the European economies

emerge. But, perhaps unfortunately, chances are that these conditions will not all be

met in sufficient measure. Europe may then well go globally the way that Tuscany

has gone within Europe: it would become a magnet for wealthy rentiers and rich

tourists from Asia and the Americas, rather than one of the leading powers in the

post-crisis world order.

Postscript, 6 December 2011

As these lines are added, the Euro Summit of 9 December is fast approaching, and

the situation of the moment has made it abundantly clear that the days of mud-

dling through have passed. Europe is facing a historic choice: either the European

leaders succeed in charting a way forward for the euro, or they fail and thus set in

motion a dramatic return to national solutions to the crisis. There are some signs

that the first outcome is still possible: differences between Sarkozy and Merkel seem

smaller than before; there seems to be better coordination between the German

government and the ECB than before; political developments in Greece, Italy and

Belgium seem to hold some promise; and there seems to be a growing awareness of

the dangers that a failure would entail. But on three key issues little or no progress

has been made: there is a very one-sided obsession with balanced budgets without

any recognition of the need for pro-growth policies; there is very little talk of

regulation of the financial markets; and there are no provisions for increased

democratic legitimacy for the European project. Failure to include these elements

in the package, it has to be feared, can ultimately only strengthen the hands of the

populist extreme right throughout Europe. The responsibility resting on the

shoulders of the European leaders could hardly be greater.

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at 0

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05

June

201

2